What Does Cost to Build Mean?
The cost to build is an alternative method used to estimate the value of an asset, whereby the costs incurred to construct the asset and make it fully operational are determined. Under this approach, estimates of total labor hours and material costs incurred to develop are used to assess the value. A premium usually ranging from 10% to 15% can be applied to the costs to build as consideration for the effort being saved by a hypothetical buyer.
Divestopedia Explains Cost to Build
Before acquiring a company, most sophisticated buyers will analyze the cost to buy versus the cost to build internally. If the acquirer believes they have the necessary resources and capacity to build a similar sized operation in a reasonable time frame, then it is likely that they will not pursue an acquisition. As a vendor, it is important to identify the significant obstacles facing a new entrant into your company's market including legal, market and/or capital barriers. This will provide evidence to a buyer that it is better to pursue an acquisition than to try to build it themselves.